This issue is not your run-of-the-mill investment newsletter. After all, how often do you see comments about orgasms or the NCAA Basketball tournament come into play with investing?

Look, after last week's performance it is time investors are shaken out of their paralysis so they can wake up, smell the roses and get out of neutral. The good news is that most of the market signals point to Smallville and key segments of the small cap arena which right in the sweet spot of you, the subscriber. Of course, we would be remiss if we didn't highlight a stock that could gain nearly 30% in the coming months. It's a bit out of the box but a stock with a high profile founder, great brand recognition and happens to be coming off highs and then lows following a wildly successful late 2014 IPO that flew too far too fast.

March 15, 2015
Volume 6, Issue 11

The Goldman Guide

WHAT THE MARKET IS TELLING YOU TO BUY

Does recent trading mean that investors should beware the ides of March? We don't think so. Ask the average investor and the current sentiment is more like "to be or not to be"—or in the current environment, "to buy or not to buy, that is the question."

One example of this stance is the change in the latest AAII Investor Sentiment Survey. There was a big jump in the Neutral category and slight increase in the Bearish category, with a decline in the Bullish sentiment. In fact, the current 43% Neutral sentiment is substantially higher than the 31% long term average, indicating investors know not what to do..

This paralysis is fueled by concerns over rising rates (which we outlined last week), the rising dollar, weak oil prices, and fair value for equities. As we head into the most exciting week of the year where millions of Americans will fill out their brackets by picking winners in the NCAA Basketball Tournament, we see no reason not to be decisive and buy. What is most important—it is telling us what to buy, and not to buy.

Signal #1: Rising rates.

In our view, the Fed is not in a rush to raise rates. They know that the "favorable" unemployment numbers are as fake as my friend's wife's orgasms. Higher unemployment should mean higher GDP growth but it simply is not there. And, inflation? Key non-gasoline prices are de-creasing.

Look, rates will rise, but not today. It will likely occur mid-year and this event is already reflected in stocks. Interest-rate sensitive stocks like utilities are down and financials, which benefit from higher rates, is the #1 or #2 biggest sectorweighting in some leading indices and ETFs. Regardless, rising rates means growth stocks are the place to be.

All Signs Point to Smallville

Signal #2: The Rising DollarInvestors freaked out late last week as the dollar rose sharply, especially against the euro, given the central bank's recent and proposed measures. A reasonably strong dollar is a good thing, but too strong can hurt multinationals' sales abroad, since home country currencies buy less U.S. goods When sales in these currencies are translated into dollars it also has a negative effect on big U.S. corporations. Therefore, big cap stocks in the U.S. can fall under prolonged pressure. On the plus side, a high value dollar will attract foreign investments, propping up our values. Still, investing in companies with no sales abroad are not impacted by the dollar rise. Thus, small growth companies are likely to be the beneficiary of this trend and more dollars should move into this category.

Signal #3: Weak Oil PricesU.S. GDP growth and pricing power are negatively impaired by the continued drop in oil prices but, big buyers of oil and gas that have thin margins, such as airlines, trucking, and other transport companies benefit. Perhaps consumers will finally use these bucks for additional spending cash instead of socking it away, thus helping consumer discretionary companies. The market is telling us that is not yet the case. Moreover, declining prices indicate that consumer companies are having pricing issues. One this abates, this sector will be in favor. Until then, there is not a great deal of reason to buy into the space aside from some cheap apparel companies due to seasonality.

Signal #4: Fair Value for StocksStocks are indeed likely fairly valued, on a long term basis. Still, I would venture to say that there is more risk with big caps than small caps given the concerns outlined above. For example, the S&P 500 Index trades at a 12-month forward P/E of 17.55 while the NASDAQ 100 trades 18.75x. The Russell 2000 trades only ever so slightly higher, at 18.92x. This is interesting especially when one takes into account that on a YTD basis, the index is up 2.5%, the same as the NASDAQ 100, yet the RUT does not have the advantage of the heavy weighting of big performers such as Apple (NASDAQ—AAPL) and Amazon (NASDAQ—AMZN) which are up an average of roughly 16%! Plus, this index is crazy tech-heavy, while the RUT's biggest sector weighting is financials, followed by heath care and technology. The bottom line? It is understandable if investors are ambivalent about big cap. After all, given current trends, small is where it's at!

A Virgin No Longer

Now that we have determined that the place to be is in the small cap growth category, are there stocks that fulfill the previously outlined criteria?

Since rates have not yet risen, its borrowing is not yet impacted.

A rising dollar does not hurt the stock.

It is definitely aided by falling oil.

It trades at a reasonable valuation with solid brand recognition.

The answer is affirmative of course and there is even one that has a bigtime face of the company to lead the brand. Plus, since I already made an allusion to orgasms, this week's featured stock is perfect for this issue.

Virgin Airways Inc. (NYSE—VA—$34.77) is known for its mood-lit cabins, three beautifully designed classes of service and innovative fleet wide amenities — like touch-screen personal entertainment, Wi-Fi and power outlets at every seat, VA has built a loyal following of flyers and earned a host of awards since launching in 2007 — including being named both the "Best U.S. Airline" in Condé Nast Traveler's Readers' Choice Awards and "Best Domestic Airline" in Travel + Leisure's World's Best Awards for the past seven consecutive years.

Founded and 25% owned by famed businessman Richard Branson, VA went public in November in one of the largest airline IPOs in history, to much fanfare. The Company is very forward thinking in its technology offerings and approach and it is already winning many fans in the U.S. The stock is cheap now that is down about 20% off of its December 2014 high. At current levels the stock trades 7.7x 2015 estimated EPS, despite its newfound operating leverage. Now that it has some trading history behind it, and it benefits from the factors above, we believe that accumulation will occur in the near term. We expect the stock could approach its $45 high in the coming months, which still reflects only a 10x multiple on FY15 earnings per share.

Have a great day!

Launched in May 2010, The Goldman Guide is a free weekly publication of Goldman Small Cap Research and is written by Founder Rob Goldman with contributions from the GSCR contributor team. This non-sponsored investment newsletter seeks to provide investors with market, economic, political and equity-specific insights via an action-oriented, straight to the point approach. No companies mentioned in this newsletter are current sponsored research clients of the Company or its parent, unless noted, With rare exceptions, all companies or investment ideas mentioned in this publication are publicly traded stocks listed either on the NYSE or the NASDAQ. Goldman Small Cap Research members and contributors' bios, certifications, and experience can be found on our website: www.goldmanresearch.com.

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